In order to maintain some level of taxpayer certainty, there are general time limits applied to CRA’s ability to assess taxpayers for previous periods. The normal assessment period is three years under ITA clause 152(3.1)(b) and four years under ETA subsection 298(1) and ITA clause 152(3.1)(a). However, CRA can assess a taxpayer in respect of a matter at any time where,inter alia, the taxpayer has made a misrepresentation attributable to neglect, carelessness or wilful default in respect of that matter (ITA subclause 152(4)(a)(i); ETA subsection 298(4)(a)). The recent Inwest decision (2015 BCSC 1375) considers what “misrepresentation” actually means in this context, and just when a misrepresentation will be “attributable to neglect or carelessness”.

On the facts, Inwest owned the majority of Future Shop shares, which it agreed to sell to Best Buy, which had an accrued and unrealized $354 million capital gain.  In addition to federal income tax on that gain, Inwest would have owed BC provincial income tax, because it had a permanent establishment in BC.  In order to avoid the BC tax, Inwest’s president arranged a plan, whereby Inwest would establish a Yukon corporation (Wesbild), which was essentially then used as a conduit to transfer the Future Shop shares to Best Buy.  The rationale for the plan was for Wesbild to not have a “business” and therefore not have a permanent establishment in BC for the purposes of the BC ITA, thereby avoiding BC income tax on the capital gain. 

Accordingly, and in implementing the tax plan, Wesbild filed a tax return for the transaction year which did not include an amount for BC income tax.  CRA confirmed the return in an initial Notice of Assessment, but re-assessed Inwest nine years later, and well outside the normal three year reassessment period.  (By this time Wesblid was dissolved, with Inwest assuming its obligations).

After CRA confirmed the Notice of Assessment in the objections process, Inwest filed a Notice of Appeal in the BC Supreme Court (BCSC) and brought an application for a summary trial to determine whether CRA was statute-barred from assessing outside the normal assessment period. 

Before the BCSC, the Crown argued that the matter was not appropriate to decide on a summary trial and that Inwest had made a careless or negligent misrepresentation regarding its residency, thereby allowing CRA to assess outside the normal reassessment period.

As to its jurisdiction, the BCSC determined that it could well decide the issue on summary trial as there was sufficient evidence to decide the issue and there was potential to resolve the entire litigation or narrow the only trial issue to merely the correctness of the return (the BC provision dealt with here is somewhat similar to section 58 of the TCC Rules, which allows for determination of a question of law, fact or mixed fact and law on application prior to trial). 

On the substantive issue before it, the BCSC concluded that a misrepresentation need not be a statement of fact, but could also be a legal position taken by the taxpayer, unless that position was reasonable.  Accordingly, the BCSC felt compelled to consider whether Inwest’s position on filing (i.e., that it did not have a BC permanent establishment) was a reasonable position.   If its filing position was reasonable, then it would not be a “misrepresentation” for the purposes of the ITA such that the general assessment period would apply. 

In evaluating the reasonableness of Inwest’s position, the BCSC observed that the fundamental difference in opinion regarding Inwest’s position was the application of a particular test from another case regarding the definition of business/permanent establishment.  The BCSC found Inwest’s position reasonable on this point (and therefore not a misrepresentation), as it was at least an arguable position based on case authorities and the facts as presented.  Further, CRA was aware of Inwest’s position from the outset, as it was clear from the 2002 return.

While strictly obiter, given the conclusion that there was in fact no “misrepresentation”, the BCSC also went on to consider the negligent/carelessness aspects of the test.  The BCSC noted that this element of the test required a consideration of whether the taxpayer bona fide believed that its position was correct, including a consideration of the taxpayer’s actions that led it to take its position.  The evidence here showed that Inwest’s president sought professional advice, was aware of the nuances of the issues surrounding the plan and rejected other, more aggressive, tax plans.  Accordingly, there was no negligence or carelessness in completing the return. 

In our view, the BCSC came to the proper conclusion.  The return filed outlined the position taken by the taxpayer for CRA to consider.  Denying the CRA the opportunity to reassess the taxpayer outside of the normal assessment period here is entirely consistent with the underlying purpose of the relevant legislation, which is to provide taxpayer certainty and closure on tax matters not otherwise amounting to misrepresentation or fraud. 

That said, where a taxpayer takes a legal position that is clear to CRA upon filing, the possibility for it to be characterized as a “misrepresentation” appears contrary to the legislative purpose.  Taxpayers should be entitled to take novel – albeit clear – positions in their returns, without having to worry that they be considered not reasonable and therefore subject to CRA assessment for an infinite period.  Accordingly, courts ought to have a very low standard for what constitutes a “reasonable” legal position taken by a taxpayer.

* Bryan and Rob's article on this topic appears in the September 2015 edition of Canadian Tax Highlights.